Possible Changes to the Canadian Personal Property Security Acts 2000

Section 4 – Exclusions from the Act

4. Except as otherwise provided in this Act or the regulations this Act does not apply to:

(c) the creation or transfer or an interest in present or future wages, salary, pay, commission or any other compensation for labour or personal services, other than fees for professional services; [delete and replace with local variation if required – see comments 1-4 below]

(f) the creation or transfer of a right to payment that arises in connection with an interest in or a lease of land, other than a right to payment that is evidenced by a security or instrument; [no change but enacting jurisdictions should ensure that their real property legislation is amended to provide for the registration and priority status of assignments of land-related rights to payments: see comment 5 below]

(i) the creation or transfer of a right to damages in tort for personal injury or death of an individual, and of a right to any payment derived from such a right including a right represented by a judgment or a settlement agreement;

 

(k) an security agreement interest, other than an interest referred to in clause (k.1), in personal property that secures payment or performance of an obligation created by an agreement governed by an Act of the Parliament of Canada that provides a system of priority rules dealing with deals with the rights of parties to the agreement or the rights of third parties affected by a security interest created by the agreement the interest, including an interest created by an agreement governed by sections 425 to 436 of the Bank Act (Canada);

(k.1) an interest in a registered ship or recorded vessel under the Canada Shipping Act that secures payment or performance of an obligation;

(l) a trust, whether express, implied or resulting, under which the trustee is obligated to relinquish the trust property, or its value, to the settlor or beneficiary of the trust, provided:

(B) the trustee is not the settlor of the trust;

(B) the trust property is not proceeds derived from a dealing in other property which is collateral under a security agreement between the trustee and the settlor or beneficiary to which this Act applies.

COMMENT

1. Clause 4(c) currently excludes from the PPSA all interests in “present or future wages, salary, pay, commission or any other compensation for labour or personal services, other than fees for professional services.” The scope of this exclusion is broader than the prohibition on the assignment of wages, etc. typically found in provincial employment standards legislation. This means that the priority status of otherwise valid assignments of commissions owing for non-professional services (e.g. real estate sales commissions) is determined by the common law rule in Dearle v. Hall (first to give notice to the account debtor generally prevails), and that the assignment is effective against a trustee in bankruptcy without perfection by registration: see e.g. Re Lloyd (1995), 30 C.B.R. (3d) 113 (Alta. Q.B.); 522446 Alta. Ltd. v. Gladstone Village (1997), 12 P.P.S.A.C. (2d) 267 (Alta Q.B.); F.W.C. Land Company v. Turnbull (1997) (QL) B.C.J. 1985 (S.C.).

1. In view of the commercial importance and prevalence of financing transactions involving interests in commissions and the like, there is no justifiable reason for continuing to exempt them from the general PPSA rules governing the creation or transfer of an interest in an account. It is therefore proposed to delete the exclusion altogether subject to a replacement with a local variation in cases where the local policy of the enacting jurisdiction so requires.

1. In deciding whether a local variation is needed to replace clause (c), it should be understood that the proposed deletion would not prejudice the continued application of statutory prohibitions on the assignment or creation of an interest in wages, etc. contained in provincial employment standards legislation. The operation of such prohibitions would be preserved by s. 9(1) of the PPSA under which a security agreement is effective according to its terms “except as provided in . . . any other Act.” Alternatively, current clause (c) could be replaced by wording which precisely tracks the scope of the prohibition on the assignment of wages, etc. in the employment standards legislation of the enacting jurisdiction so as to narrow the scope of the exclusion to interests which are altogether invalidated under other provincial law in any event. The former approach is found in the Ontario PPSA. The latter approach appears in the Atlantic PPSAs. Both achieve the same substantive result.

1. In some provinces, the employment standards legislation does not invalidate all assignments of wages, etc. within its scope. In Saskatchewan, for instance, assignments to employee credit unions and to tool suppliers are permitted as a matter of local public policy. Where the permissible class of assignees is as narrow as this, the enacting legislature may feel that they should be relieved of the registration burden and priority risks imposed by the PPSA given the absence of any realistic risk of third party prejudice. In that event, the square-bracketed note which accompanies the proposed deletion of clause (c) above would allow for the insertion of an appropriately tailored local exclusion.

1. Under current clause 4(f), assignments of land-related rights to payment, including lease payments, mortgage payments, and payments under agreements for the sale of land, are excluded from the PPSA (unless evidenced by an “instrument” or a “security” as defined in section 2). This policy reflects prevailing commercial expectations and practice and should be maintained. However, while the wording of clause 4(f) should remain the same, it is proposed to include a square-bracketed note to signal the importance of ensuring that the relevant real property legislation in each jurisdiction is amended to provide for the registration and priority status of assignments of land-related rights to payments.

1. The proposed revision to clause (i) is designed to extend the application of the PPSA to security interests taken in commercial tort claims. As currently drafted, the clause excludes all security interests in tort damages claims from the scope of the Act. This is not commercially reasonable where, for example, a security interest in all of a business debtor’s personal property is given and a receiver is appointed to enforce it. The receiver currently cannot treat a security interest in a tort claim held by the debtor (e.g., a claim for inducing breach of contract or a claim for passing off) as an asset falling within the scope of the PPSA security interest being enforced. The receiver’s rights and duties are instead governed by law outside the PPSA, as are the conditions governing attachment, perfection and priority of the security interest in the relevant claim. The revision to clause (i) above would expand the scope of the PPSA to include such commercial tort claims by narrowing the exclusion to damages claims for personal injury or death.

1. In narrowing the scope of the existing exclusion, proposed clause (i) would also end any debate on the validity of a security interest taken by a secured party in a cause of action for damages other than damages for personal injury or death. At common law, the assignment of a cause of action is subject to prima facie challenge under the doctrine of champerty and maintenance. This prohibition is subject to several exceptions, including importantly, cases where the assignee has a legitimate commercial interest in the subject matter of the assigned claim: see Frederickson v. I.C.B.C. (1986), 4 W.W.R. 504 (B.C.C.A.). This exception arguably covers the case where the assignee is a secured party: see N.R.S. Block Bros. Realty v. Minerva Technology (1997), 31 B.C.L.R. (3d) 295 (S.C.). The proposed revision to clause (i) would put the matter beyond doubt in the case of an assignment of a claim for damages other than damages for personal injury or death. Because any security interest taken in such claims would fall within the PPSA, the secured party would have the benefit of section 9(1) under which a security agreement is effective according to its terms, subject only to countervailing statutory provision.

1. The above proposal would further amend clause (i) to expressly exclude from the PPSA a security interest taken in a right to payment which derives from an excluded damages claim for personal injury or death, as where the claim has been reduced to judgment or is represented by a settlement agreement with the tortfeasor or the tortfeasor’s insurer. This would end any debate on whether the exclusion covers interests taken in rights of payment derived from a tort claim and would confirm the conclusions reached in interpreting existing clause (i) in such cases as Alberta Opportunity v. Dobko & Housgestrol (1995), 167 A.R. 205 (Q.B.); Gauthier Estate v. Capital City Savings and Credit Union Ltd. (1992), 3 P.P.S.A.C. 176, 2 Alta. L.R. (2d) 277 (Q.B.); and Kanisaj v. O’Brien,[1998] (QL) A.J. 402 (Q.B.). This would also ensure that the same body of non-PPSA law governs matters relating to the attachment, perfection, priority and enforcement of an interest taken in the claim itself and in rights to payment derived from that claim. In taking this approach, proposed clause (i) differs from revised article 9 under which excluded tort claims remain subject to sections 9-314 and 9-322 with respect to proceeds and priorities in proceeds. It is the view of the authors of this report that such a qualified application of the PPSA would lead to unnecessary complexity, and that the same body of non-PPSA law should therefore govern both the excluded claim and any rights to payment derived from the claim.

1. Proposed clause (i) is broadly similar to revised Article 9 in other respects but it is not identical. Article 9-109(d)(12) excludes tort claims, other than a commercial tort claim. Commercial tort claim is defined in 9-102(13) in a manner which would continue to exclude assignments of tort claims by an individual other than those arising in the course of the claimant’s business or profession. In contrast, proposed clause (i) would not exclude a consumer tort claim for damages other than damages for personal injury or death. The latter approach is preferred for the simple reason that consumer contract claims are currently covered by the PPSAs and it is illogical to exclude like claims simply because they happen to be couched in tort as opposed to contract.

1. Admittedly, this begs the question of whether the exclusion of security interests in tort claims should be wholly eliminated. Assuming such assignments are otherwise valid under other law (certainly, one can always assign the fruits of a judgment or a tort claim as an exception to the champerty and maintenance rules), then why not subject them to the same perfection and priority requirements which apply to the assignment of other rights, including contract rights? The reason for the continued exclusion is pragmatic: a right to damages for personal injury or death is usually made the subject of a security interest or transfer only in the context of a fee agreement between the tort victim and the victim’s legal counsel. The limited use of such arrangements suggests they do not raise concerns with publicity and conflicting priority rights to a degree that would justify imposition of the burden of PPSA regulation, especially registration, on the parties. Cases such as Kanisaj v. O’Brien (cited above) show that this assumption is not universally true (the debtor in that case had given multiple successive security interests in her damages claim for personal injury). Nonetheless, it seems preferable to first test the experience with narrowing the scope of the exclusion before deciding to delete it altogether.

1. The new paragraph (l) would explicitly confirm that the concept of a ‘true’ security interest in section 3(1) of the PPSA does not encompass the interest of a transferor under a "Quistclose trust" or similar arrangement involving the transfer of funds on terms that they be applied for a specified purpose, failing which the funds (or their identifiable or traceable proceeds) are to be returned to the transferor as the beneficiary of an express, implied or resulting trust: see Gignac, Sutts v. National Bank of Canada (1999), 5 C.B.R. (4th) 44 (Ont. S.C., 1987); Skybridge Holidays Inc. (Trustee of) v. British Columbia (Registrar of Travel Services) (1999), 173 D.L.R. (4th) 333,121 B.C.A.C. 16, 48 B.L.R. (2d) 159, 11 C.B.R. (4th) 130, 68 B.C.L.R. (3d) 209.

1. New paragraph (l) is also intended to confirm the exclusion from the PPSA of the kind of trust arrangements encountered in Ogden v. Award Realty Inc. [1999] (QL) B.C.J. 422 (Q.B.) and F.W.C. Land Company v. Turnbull (1997) (QL) B.C.J. 1985 (S.C.). In both cases, real estate sellers were seeking to recover sales commissions held in trust for them by an insolvent debtor. Their right to do so was challenged on the basis that the claimants’ interest in the commissions was a security interest under the PPSA and was therefore ineffective against competing creditors because it had not been perfected by registration prior to the debtor’s insolvency. Clearly such arrangements are not security interests. Like ‘Quistclose trusts’, they are true trusts in that the beneficiary of the trust who is alleged to be the secured party has and always retains the full beneficial ownership of the trust property while the trustee who is alleged to be the debtor has nothing more than the bare legal title of a trustee. New paragraph (l) is intended to be the issue beyond argument.

1. New paragraph (l) would also confirm the exclusion from the PPSA of arrangements involving the sale of services by an agent on behalf of a principal on terms that the agent is to hold the proceeds of such sales on trust for the principal less any agreed upon commission. A typical example is the sale of cargo or passenger transportation services to third parties by a firm acting as sales agent for the carrier on terms that any receivables collected by the agent for the sale of the services belong to the carrier, and to be remitted, less the agent’s sale commission, to the carrier: see e.g. Canadian Pacific Air Lines Ltd. v. Canadian Imperial Bank of Commerce (1987), 42 D.L.R. (4th) 375; Air Canada v. M & L Travel Ltd. (1993), 108 D.L.R. (4th) 592. So long as such arrangements involve a true sales agency, and so long as the principal’s trust claim is limited to the identifiable or traceable proceeds of the agent’s sales, they are true trust/agency arrangements factually remote from the world of security and outside the intended regulatory scope of the PPSA. (Compare Re Sims Battle Brewster & Associates Inc., [1999] (QL) A.J. 1285 (Q.B.) where the trust/agency agreement for proceeds was combined with a security agreement covering non-trust assets as collateral in the event that the proceeds were not paid over by the agent.) Similarly, since the arrangement is one of principal and agency, there is no transfer of an interest in the receivables generated by the agent’s sales so as to subject the arrangement to the PPSA as a deemed security interest in the nature of a transfer of accounts under s. 3(2). The agent is simply a conduit through whom ‘title’ to the collected receivables stemming from the sales passes to the principal/trust beneficiary.

1. To say that such true trust arrangements are currently excluded from the PPSA does not justify why they should continue to be excluded. In all of the situations outlined above, the alleged trustee (debtor) was a business enterprise in apparent possession or control of property belonging to another. Does this not generate the kind of ‘false wealth’ and ‘secret lien’ concerns that prompted the expansion of the PPSA perfection and priority rules to reach deemed security interests in the nature of commercial consignments, leases, and sales of accounts and chattel paper? The difficulty is that there is no easy way of extending the PPSAs to commercial trusts of the kind outlined above without having to deem all trusts to be security interests (more precisely, purchase money security interests) subject to the Act. Moreover, to attempt even a qualified expansion risks interfering to an unacceptable degree in the ability of commercial parties to use agency and trust principles to structure their transactions. Finally, the problems of third party prejudice are almost non-existent in the cases outlined above. Trust law already protects third party transferees, including competing secured parties, who acquire an interest in the trust property from the agent without notice of the trust. And since the trust property is not derived from value added by the trustee in the course of the trustee’s business, entitling unsecured creditors to assert a claim to that property would be pure windfall. There is no unjust preference at work here since the trust beneficiary’s right is an in rem right to the trust property or its identifiable or traceable proceeds; the right is not simply a unsecured preferential claim against the trustee’s general assets. See further Bridge, Macdonald, Simmonds, & Walsh, “Formalism, Functionalism and Understanding the Law of Secured Transactions (1999) 44 McGill L.J. 567 at 610-15.

1. The proposed exclusion of trusts from the PPSA is subject to two provisos.

1. The first proviso arises where the trustee is also the settlor of the trust. It is intended to cover the situation where a debtor agrees to hold property owned by the debtor on trust for the creditor on condition that if the debt is not repaid the property will be transferred to the creditor as trust beneficiary. Such an arrangement is clearly a colourable secured transaction akin to a conventional chattel mortgage.

1. The second proviso comes into play where the trust property is “proceeds derived from a dealing in other property which is collateral under a security agreement between the trustee and the settlor or beneficiary to which this Act applies.” This proviso is intended to cover cases where a security agreement empowers the debtor to deal with the original collateral – typically inventory or accounts – in the ordinary course of the debtor’s business on terms that the proceeds of such dealings are to be held on trust for the secured party. Here again the alleged trust transaction is merely a colourable secured transaction since the debtor can eliminate the secured party’s proceeds claims at any point by paying out the secured obligation. Inclusion of such an express proviso would confirm the result in Hounsome Estates v. John Deere Ltd. (1991), 3 O.R. (3d) 89 (Gen. Div.). It would thereby forestall arguments of the kind successfully advanced, albeit in a non-PPSA context, in Associated Alloys Pty Ltd v. ACN 0011 452 106 Pty Ltd. [2000] HCA 25 (11 May 2000). At issue there was whether a ‘Romalpa clause’ (a trust of proceeds clause) in an inventory financing contract should be characterized as a trust or a charge. If it was a charge, it would have been invalid for nonregistration under the registration of charges provisions of the Australian Corporations Law. The majority in the Australian High Court (Kirby J dissenting) held it was a trust. Although concerns were expressed about the policy implications, the majority considered this to be a matter for the legislature.

1. The second proviso would also cover the situation where a consignee under a true commercial consignment is obligated to hand over the proceeds of any sales of the consigned goods to the consignor. If the arrangement is a true commercial consignment, then the consignor’s rights are those of a true trust beneficiary since the consignee is merely acting as the agent for sale of the consignor’s property. The situation is analogous to the cases described above involving the sale of services by an agent on behalf of a principal on terms that the proceeds of sales are to be held on trust. However, there is an important difference. The drafters of the PPSA elected to treat commercial consignments as deemed security transactions because of the difficulties faced by third parties in objectively distinguishing inventory held by a debtor on consignment terms from inventory owned by the debtor but subject to an inventory financier’s security interest. In the case of agency arrangements involving the sale of services, no similar concerns with third party prejudice arise because it is objectively evident that the services sold are not performed by the agent, but by the principal. Treatment of the consignor’s interest in the proceeds of sale as a security interest, despite its trust character, is a necessary incident of that policy decision to bring commercial consignments within the scope of the PPSA. In the case of agency/trust arrangements involving the sale of services, there is no equivalent deemed security interest in the original subject matter of the sale, and therefore no reason to bring the proceeds of the sale within the scope of the PPSA.

1. The proposed change to clause (k) is designed to confirm that the only federally-regulated security interests which are excluded from the PPSA are those which are subject to a federal priority regime. In its current form, the wording suggests that the PPSA does not apply to any secured transaction to which federal law applies even if the relevant federal law regulates only inter partes rights. The proposed reformulation would clarify that federal security interests are subject to the PPSA in the absence of a federal law regulating the priority of the interest. However, the provisions of the PPSA on inter partes rights will be inoperative as a matter of constitutional law if they are in actual conflict with any applicable federal law provisions: Bank of Montreal v. Hall [1990] 1 S.C.R. 121.

1. On the interplay between the PPSA and federal security interests created under the Bank Act, see further the comments on the proposed additions to section 9 below.

1. Proposed new clause (k.1) would establish a separate express exclusionary rule for security interests taken in registered ships or recorded vessels under the Canada Shipping Act (C.S.A.). “Recorded vessels” in the context of the C.S.A. refers to vessels which are about to be built or are being built and which on completion would be registrable under the Act.

1. Where the security interest takes the form of a mortgage which itself is registered under the C.S.A., the scope of the proposed exclusion accords with well-established judicial and constitutional principle. The C.S.A. regulates both the enforcement and priority aspects of registered mortgages and it is clear that the provinces lack the constitutional capacity to change the scheme of priorities established by Canadian maritime law: see e.g. Finning Ltd. v. Federal Business Development Bank (1989), 56 D.L.R. (4th) 379 (B.C.S.C.).

1. It is true that the statutory priority regime established by the C.S.A. for registered mortgages is not comprehensive. The Act establishes a first-to-register ranking rule for registered mortgages and gives priority to the holder of a registered mortgage over a bankrupt mortgagor’s creditors and trustee in bankruptcy. Beyond this, the Act is silent on the appropriate resolution of third party claims. However, this does not mean that provincial law applies to fill the gap. “Canadian Maritime Law” is a body of federal law which includes, in addition to any applicable federal statutes, judicially-developed principles referentially incorporated as federal common law: I.T.O. v. Mida Electronics,[1986] 1 S.C.R. 752; Monk Corporation v. Island Fertilizers Limited (1991), 1 S.C.R. 779; Ordon Estate v. Grail (1998) 3 S.C.R. 437. Consequently, any gaps in the C.S.A. statutory priority regime will be covered by federal common law principles: Federal Business Development Bank v. "Winder 4135" [1986] 2 F.C. 154 (1984) 11 D.L.R. (4th) 308.

1. Canadian maritime law in this broad sense applies to the priority status of C.S.A-registered mortgages regardless of whether the priority contest involves a competing claim which itself is derived from maritime law or a security interest taken under provincial personal property security law. Thus, in Charles R. Bell Ltd. v. The Stephanie Colleen (1990), 36 F.T.R. 210 (F.C.T.D.), (1994) 74 F.T.R. 1 (F.C.T.D.), it was held that, constitutionally, the provinces cannot extend provincial law to conditional sales contracts covering ship’s engines and registered under provincial personal property security law once they become accessions to ships covered by a mortgage registered under the Canada Shipping Act. And see Governor and Company of the Bank of Scotland v. The Nel [1999] 2 F.C. 578 (F.C.T.D.) where a supplier of bunkers to a vessel who had retained title to the bunkers pending payment of the purchase price prevailed over the holder of a registered mortgage on the basis simply of common law principles relating to the passage of property in goods.

1. The scope of the proposed exclusion is not confined to mortgages which are registered under the C.S.A. but extends to unregistered security interests covering registered ships or recorded vessels. The proposed exclusion would apply even where the security agreement is in a form incapable of registration as a mortgage under the C.S.A., e.g. a conditional sales contract or similar arrangement under which the vendor of a registered or recorded vessel retains title pending payment of the purchase price: Brunswick of Canada v. Bounty III, [1970] Ex. C.R. 934).

1. The compatibility of the proposed exclusion with existing law in this latter connection is unclear. In Ford. v. Petford (1996),11 PPSAC 2d 227 (Ont S.C.), the enforcement provisions of the Ontario PPSA were applied in the context of a conditional sales contract covering a C.S.A.- registered vessel which had been taken and registered under the provincial regime. However, the potential applicability of federal maritime law was not pleaded in that case, and the legitimacy of applying provincial law did not receive any analysis. In General Motors Acceptance Corp. of Canada, Ltd. v. Furjanic (1994), 79 F.T.R. 172 (F.C.T.D.), the vendor was held to be entitled to rely on Canadian maritime law in an action for re-possession of a C.S.A.-registered ship notwithstanding that the vendor’s security interest had been taken and registered under the Ontario PPSA; see also Brunswick of Canada v. Bounty III supra. The decision appears to leave open the possibility that provincial law might apply concurrently. Similarly, in Re Doucet (1983), 150 D.L.R. (3d) 53 (Ont. S.C.), federal law was applied to preserve the priority status, as against the debtor’s trustee in bankruptcy, of a security interest in a C.S.A.-registered vessel which was neither registered nor registrable under the federal act but had been registered under the Ontario PPSA. However, the court declined to pass on the question of whether the security interest would have been open to challenge by the trustee under provincial law had the security interest not in fact been perfected under the PPSA.

1. On balance, it seemed to us to be preferable to relegate the regulation of security interests in C.S.A. registered vessels exclusively to federal law, whether or not such interests are registered or registrable under the federal Act. This approach avoids the confusion which would result from potentially overlapping provincial and federal law and eliminates constitutional litigation in the event that the federal and provincial laws are in actual conflict. More importantly, this approach would ensure that buyers and prospective secured parties of registered ships and recorded vessels can rely with confidence on a search of the C.S.A. registry, without having to undertake a concurrent search of the provincial PPRs. This accords with the policy of preserving the integrity of the federal registry established in Luffman v. Luffman (1897), 25 O.A.R. 48 which established that a purchaser of a registered vessel takes free from unregistered security or other ‘equitable’ interests given by the owner even where the purchaser has notice of them.

1. Under the suggested approach, the application of the provincial PPSAs would be confined to maritime mortgages covering vessels which are licensed under the C.S.A. but not recorded or registered in the federal ownership registry. This is in line with the assumption underying the regulations passed in the various jurisdictions which have adopted the model Act, under which boats are treated as serial numbered goods with the serial number ascertained by reference to the federal D.O.T. license number.

1. The proposed approach does not and cannot eliminate all potential for overlap and constitutional conflict between the provincial and federal regimes. The first step in the test for the applicability of Canadian maritime law is whether the subject matter of the legal issue at stake falls within federal legislative competence as tested by reference to whether it is one integrally connected to maritime law. In Whitbread v. Walley, [1990] 3 S.C.R. 1273, a case of tortious liability involving a pleasure craft, the Court held that, akin to aeronautics, the area of maritime navigation and shipping extends to pleasure craft as well as commercial vessels. This suggests that the subject matter of marine security, even where the vessel is not registered under the federal act, falls within the federal sphere of competence (certainly this was the assumption underlying Royal Trust v. Brechert (1994) 51 B.C.A.C. 200 (C.A.). However, this is not enough to displace otherwise applicable provincial law of personal property security. The provincial regime may still apply, either as a suppletive source of Canadian maritime law, or because Canadian maritime law does not supply, and cannot be reformed to supply, a counterpart rule for the issue at hand: Paquin v. Cote [1999] F.C.J. 1994 (F.C.T.D.). In the critical area of priorities, the absence of any counterpart to the registration regime supplied by provincial law in the case of security interests in licensed vessels gives rise to a strong argument that the provincial PPSAs would apply exclusively under one or another of these theories.

Next Annual Meeting

2018 Conference (Centennial)

Delta Hotel

Québec City, QC

August 12 - 16, 2018